Interest will rise to 3% by 2017, says Bank of England governor Carney

Interest rates will soar to 3% by 2017, as Britainís economic recovery begins to fully gather momentum, the Bank of England governor Mark Carney has identified.

Carney estimated that rates would soar up from their current historically low value of 0.5% in the next three years, forecasting that they could eventually reach as high as 3% at the end of 2017.

Mr Carneyís comments are thought to be a direct response to an announcement made by the Organisation for Economic Co-operation and Development, who this week identified the UK as the country with the quickest growing economy in the western world.

The OECD estimated that Britainís economy would grow by an astonishing 3.3% during the first 6 months this year, taking its growth rate past any G7 country at present.

The governor had previously refused to buckle under intense pressure to raise interest rates prematurely, citing that the countryís economic recovery thus far has been ëunsustainableí. He argued that other factors such as labour productivity and real wages had to pick up before he would begin to raise rates, and outlined that he would attach the speed in which he would implement hikes to the countryís overall economic performance in the future.

However, the OECDís forecasts have likely given him the assurance he has been looking for on the countryís economic recovery, though he has still maintained a cautious stance and identified that he will only adopt a reactionary approach when it comes to raising rates in the future.

ìWhen the time comes, a welcome time to raise rates, we expect it to be gradual, and the degree to be limited,î he said.

Savers boosted by borrowers set to struggle

The news that rates will begin to rise soon, and then creep up to a more normal 3% by 2017 will be welcome to the ears of Britainís embattled aspiring savers, who have been subjected to a series of torrid and low rate offerings from banks whilst rates have been kept low.

With ISA season approaching, it is likely that savers will take Carneyís remarks to imply that rates will rise sooner rather than later, and might opt to wait before fixing their money into a savings account.

However, whilst savers have been given a much needed boost, it is the countryís swarms of borrowers who are set to be subjected to a huge financial transformation in their monthly outgoings towards their loans, with rate rises inevitably leading to a rise in the costs of borrowing.

In particular, households who currently already squeeze their income to the limit in order to subsidise the costs of their mortgages are at the most risk, with Carney warning that ëa large number of households are in vulnerable positionsí with rate rises imminent.

The groups that will struggle the most are those who currently pay their mortgages on an interest only basis, as these people would have contributed nothing towards their mortgage and will see a huge rise in the amount they pay on interest alone in the next three years.

Brokers have estimated that mortgage repayments for someone who has a £300,000 mortgage could rise by almost £500, if rates creep up to 3%, and this is even higher for someone paying on an interest only basis, which would see their monthly contributions rise even further.

They also expect a host of people to opt to try and fix their mortgage this year, with rate rises bringing about far higher monthly mortgage contributions.

ëCurrent generation at financial riskí

Nationwide, one of the UKís largest mortgage distributors criticised the Bank of England for keeping rates at 0.5% for so long, arguing that they had left a generation of homeowners completely unprepared for dealing with the normal costs of borrowing, and warned that many could be at financial risk when they are subjected to regular costs for the first time.

Worryingly, their data indicates that 8% of people who currently have mortgages are contributing 35% of their income before tax on their mortgages, implying that their wages are already being squeezed in order to afford rapidly rising costs in the housing market.

And the Bank of England have forecasted that this percentage would double when rates rise beyond 2.5%, meaning that some people could be faced with the bleak situation that they are contributing 70% of their wage just to their mortgage costs.

Monetary Policy Committee member, David Miles, said that the affects of rate rises on people who currently have higher rate loans could be far more detrimental than on others.

He outlined that the disparity in borrowing costs for banks and other external lenders from sector had increased, and urged borrowers to be cautious when taking out loans from institutions that have higher rates than banks.

However, Mr Miles allayed fears that rises would go any further than 3% in the future, identifying that the global finance sector had evolved so that it would no longer be suitable to have rates as high as 5%.

ìThe equilibrium is a bit lower than the level we used to think of as normal ñ 5 per cent. We will not get back to the old normal,î Mr Miles said.

Miles suggested that the new norm for interest rates would be between 2.5% and 3%, which means that savers may never have as an accommodating climate as they did prior to the start of the economic downturn in 2008.